The Disreputable Inherit the Earth

Hubris and horse manure go together. Just look at the national economic scene: in the past half century, America has turned economic logic on its head, with the gunslingers grinning all the way. Now we face the consequences. It’s true of San Diego too. The old values have been arrogantly jettisoned. Now the piper wants his money.

Let’s begin with the national picture. Fifty years ago, derivatives were almost unknown, and for good reason. People knew them to be gambling instruments, not investments. Back in the old days, guys with green eyeshades and fat cigars peddled puts and calls from smoke-filled offices that were often shared with bookies. It was not a reputable business.

Then in 1973, the Chicago Board Options Exchange was born. It sold these instruments — the puts, calls, strips, straddles, swaps — on an organized exchange. Initially, respectable people cocked an eyebrow at this wide-open gambling. (Derivatives are not assets or investments but bets on the direction of a stock, bond, or other financial instrument.)

Derivatives expanded exponentially and so did hubris. Financial companies claimed they had discovered a magic method for handling risk. Derivatives known as credit default swaps would guarantee a company’s debt. These swaps were then traded over the counter, almost totally unregulated.

Deregulation was critical to this new mentality. The old walls between banks and brokerage houses were torn down. Bank-reserve requirements were loosened; after all, banks had new computerized risk models and new tools — such as derivatives and offshore hideaways — that lessened the need for those stuffy old reserve requirements of yore. Thus arose the shadow banking system, which resembles a Ponzi scheme.

Remember when banks referred to themselves with words like “trust”? Back then, it was not a sin for a bank to be conservative, cautious. Now the face value of global derivatives is more than a quadrillion dollars. The U.S. government is going broke bailing out institutions like Fannie Mae and Freddie Mac, as well as the banks and investment banks that are tied to derivatives. Then when the bankers were drooling over a $700 billion taxpayer bailout, they bitterly opposed the House of Representatives’ passage of a bill to give credit cardholders more rights. The Federal Reserve fears the interconnectedness of the derivatives that caused the chaos; that is another way of saying that these crapshoot gambling chits of 50 years ago now control the financial world. Bear Stearns, Merrill Lynch, Fannie and Freddie, AIG, Lehman Brothers — their woes were all tied to derivatives, most of which are deliberately so complex they are impossible to understand.

Thus did derivatives climb out of dank bookie joints and come to dominate the world financial structure. But even though the government bails out the malefactors, $100 million-a-year executives still prefer deregulation. They want the government to hand them money but not tie their hands in any way. Hubris and horse manure go together.

Just look at San Diego. In 1996, the City hosted the Republican convention. The idea was to tout then-Mayor Susan Golding for the U.S. Senate. Golding’s money manipulator, Jack McGrory, found a source of lucre for supporting the convention: the pension fund. It was tapped. When the labor unions found out, they screamed. So they were promised more benefits. The city council gave workers the ability to purchase, at a below-cost price, benefits for which they had not worked. When the mistake was discovered, employees were given several months to purchase credits at the actuarially inaccurate rates. People piled in, and the City lost $146 million. Employees also got the Deferred Retirement Option Plan (DROP), which is egregious double-dipping. Employees at age 55 say they will retire in five years. They continue getting their salaries, but in addition, 90 percent of their highest one-year salary is deposited into their personal account each year, drawing 8 percent annual interest and cost-of-living adjustments. Then they retire with both an annuity and a lump-sum payment from the DROP account.

With astonishing hubris, officials declared this manna wonderful. They seemed surprised when a huge deficit arose. Then they illegally concealed the deficit in bond prospectuses. “They thought we could increase the benefits and decrease the contributions and there wouldn’t be a deficit,” says City Attorney Mike Aguirre, who is being attacked for going to court to try to do something about it.

The developer Sunroad decided to defy the Federal Aviation Administration by placing a tall building too close to an airport. Mayor Jerry Sanders, who had received major contributions from Sunroad and its owner, tried to help. They were thwarted, but not before Sanders’s ethics czar wrote a hilarious study attempting to whitewash the mayor’s role.

“They ignored the fire problem,” not following suggestions of a fire chief who resigned in frustration, notes Aguirre. “And they ignore the water problem, although we are more dependent on water from elsewhere than other cities,” says Aguirre. But all along, the Sanders administration has assured the public that both the fire-protection and water problems are under control. Yes, horse manure inexorably follows hubris.

Just as derivatives came to dominate international finance, redevelopment came to dominate and distort the local real estate scene. It started with the state telling cities that it would let them take a much larger percentage of the tax increment if they did redevelopment in so-called blighted areas. Prevarication became the main tool of governments: downtown San Diego was declared blighted. The City set up the Centre City Development Corporation and Southeastern Economic Development Corporation, and their missions were to line the pockets of developers by twisting the definition of blight.

When an organization’s core mission is dishonest, there are going to be scandals. An audit has found that Carolyn Smith, president of Southeastern Economic Development Corporation, authorized more than $870,000 in sometimes fraudulent extra pay to herself and her subordinates between 2003 and 2008.

When Nancy Graham was named head of Centre City in late October of 2005, the search committee boasted that it had “conducted a well-defined and thorough national search,” according to a news release. Yeah, it was thorough. The South Florida media at that time were full of stories about Graham’s conflicts of interest with a private developer named Related. I had a Reader column hitting on those conflicts in November of 2005, before she arrived. The California wing of Related was named to do a big project at Seventh and Market. In April of this year, I asked Graham if she had any conflicts of interest. “I have intentionally stayed away from this deal. I was at some meetings where we were not able to reach agreement,” she snapped, adding that she was getting annoyed with “unfortunate rumors or conspiracy theories that get started around here.” It later came out that she had accepted money from Related in 2007 while receiving $248,000 a year from Centre City. She resigned and left San Diego; the project was canceled. Aguirre is prosecuting her.

Funny coincidence; While reading this article at lunch, I was also listening to an interview on NPR with Steve Fraser (Author of Wall Street: America's Dream Palace, among others). He described his next book which is going to be a comparison of what he termed Americas two gilded ages dominated by Wall St. types, roughly the age at the end of the nineteenth century (I didn't get the exact years), and the age from the time Reagan was elected through last Monday. He said one stark difference between the two was the moral outrage from religious leaders which helped lead mass protests against the robber barons the last time around. He noted that this time around the moral outrage is almost completely absent, in this day and age where televangelists are preaching how to get rich. The old christian ethic that gambling was an egregious sin and that Wall St. was full of money lenders and gamblers has all but completely disappeared. The flip side to the lack of moral outrage is that there is not likely to be a backlash against Jews this time around.

It was interesting to listen to that while reading Don's article.

I haven't read anything by Fraser. Does anybody know if he is worth reading?

It seems that the only way to counter the hubris and horse manure of government and the financials that pull government's strings is to start slinging some of the latter of my own.

I am in the process of starting campaigns in every state for a grassroots campaign leading to a constitutional convention over the following, in four simple sections...

The following language is made available to the people of the several United States of America. It is not a proposal for members of the Congress of the United States, unless the people of a State instruct their Representatives and Senators to recognize their call for a Constitutional Convention (pursuant to Constitution of the United States Article V), convened for the purpose of debating the adoption of the following language:

PROPOSED BARTER BILL OF RIGHTS

Article __

Section 1. Congress shall make no law regarding the reporting or taxation of private transactions between persons not involving the legal tender of the United States; all such existing laws are hereby repealed or limited to those other transactions as defined by law.

Section 2. No State shall make any new law or regulation, or amend any existing law or regulation, regarding the reporting or taxation of private transactions between persons not involving the legal tender of the United States without a two-thirds majority ratification by the people of the State, with abstentions not counted.

Section 3. Congress shall have power to declare that the purchase or sale of any present or future class of derivative financial instrument or similar commercial paper is not a transaction exempted by this Article from reporting or taxation, where at least one party is a natural or artificial person, or any combination of such persons, subject to the laws of the United States.

Section 4. Congress shall have power to establish and adjust taxes on the profit in any interstate commercial transaction not involving the legal tender of the United States, where at least one party is subject to the laws of the United States.

Thus it has been proven again that we have legislators corrupted by banking and trading special interests in exchange for free passes to commit grand larceny against taxpayers/voters/families of America.

And the worst case scenario consequence is that out of control numbers of voters/taxpayers/families are going bankrupt, which defines a crime against the American people by those we elect in this so-called American Capitalist Democracy.

With Nov. 4 coming up there has never been a better time for Americans to demonstrate our outrage by replacing all incumbents in Washington.

Don, as you well know more than most, Wall Street could very easily bail itself out if it really practiced what capitalists preach, Invest In America.

Specifically, there are $Trillions available to strengthen Wall/Main Streets from the Forbes 400 Richest American list, like the Waltons who export hundreds of thousands of jobs out of America to maximize their profits. And from corporations that have received $Trillions in tax break windfalls since Bush entered the White House, like the oil companies alone could do it.

Buffett should show some true leadership himself by forming a Coalition To Bail Out American Capitalism.

But the truth is that all they want to do is maximize their greed at the expense of the American taxpayer regardless of the destruction they cause to American families.

If it were only that simple. The Donkeys and Elephants have legislated a two party system such that it is almost impossible for anyone else to gain a foothold. It is essentially another form of gerrymandering.

There is no incumbent running for president, but your choices outside of McCain/Obama are polling around a combined 6% and are not even invited to debate.

Our two party system has failed America. We end up with two polar opposite ideologues who represent the rabid fringe of their respective parties. That guarantees that 75%-80% of Americans will be disappointed with whichever one is elected.

Here is what I see when I shut my eyes and dream:

When was the last time a presidential candidate was not a current or former Senator/Congressman/Governor? I say screw the current party system that drags the presidential election out for a ridiculous 18 months or so, and throw every current or former Senator/Congressman/Governor into the hat for a series of votes over 8 weeks. After two preliminary votes knocking out 75% each followed by two voting rounds knocking out 50% each, we would be left with around 14 serious candidates for the final 4 week push. The first two week cycle would require 2 debates a week and then a vote to select the final four. Each of the final four would then announce their vice-presidential choices.

That format would remove a ton of wasted time and money, while splintering the two major parties, giving a much better chance that a moderate from either party representing the majority of Americans would emerge, and would give a legitimate chance for third party candidates to be heard and make a splash (Which is why it will never happen).

Don,
I'm trying to remember.... who was it who set up the SEDC and CCDC? Oh yeah, Pete Wilson. And who was it who got General Retirement members in the SPSP system? Hmmm... Pete Wilson. And if I'm not mistaken, who's the first one who raided the pension system? Yep, Pete Wilson. Can anyone tell me why folks call him our best mayor ever? Fingers point at Susan Golding as starting the downfall, but I feel it was really Wilson.

One little point, Don. You've let your hatred for the retirement system get in the way of truth again. Your writing implies that the city pays into DROP. That is not true. DROP is a tapping of the employee's own retirement. That percentage maxes out at 90%. It is not a flat out 90%. In fact a General Member cannot reach 90% at age 55 unless they start working for the city full time at age 19. But hey, what's a little exaggeration to make a point.

Response to post #3: First, in my post #11 above, it should be "I remember HER saying it." Then to your perceptive observations. One thing you can say of the robber barons of yore: they were helping finance the industrial revolution. They were building railroads, steel companies, auto companies, etc., or greasing the financing of them. By contrast, Wall Street today is mainly obsessed with gambling on derivatives. Venture capital is a small part of its business; it is busy effectuating hostile takeovers, as well as the derivatives gambling. Best, Don Bauder

Response to post #4: The Senate passed a bailout measure. It should have done something to demand stiff re-regulation, and to effectuate the orderly phasing out of derivatives, excepting some essentials such as commodities futures. Best, Don Bauder

One little point, Don. You've let your hatred for the retirement system get in the way of truth again. Your writing implies that the city pays into DROP. That is not true. DROP is a tapping of the employee's own retirement. That percentage maxes out at 90%. It is not a flat out 90%. In fact a General Member cannot reach 90% at age 55 unless they start working for the city full time at age 19. But hey, what's a little exaggeration to make a point.

Hahaha...JF with more of his pie in the sky baloney to try to keep his scam going!

BTW JF, where have you been at????
Now back to the action. JF, these pension scams are BKing the City, County State and Country, and DREOP is one the biggest scam going because you do NOT RETIRE!!!! You just keep on working, earning TWO, yes count them, TWO paychecks. That is ripping off the taxpayers.

BTW, here you go JF, public pensions BKing the country:

The Intergenerational Transfer of Public Pension Promises

Robert Novy-Marx
University of Chicago - Graduate School of Business

Joshua D. Rauh
University of Chicago - Graduate School of Business; National Bureau of Economic Research (NBER)

September 2, 2008

Chicago GSB Research Paper No. 08-13

Abstract:
The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Johnny,
Sorry buddy, but you do NOT get two paychecks. You get one paycheck and one retirement check. Is that a technicality? Not really, when you consider that millions of military retirees collect a military pension and continue to work for the government as contractors. Consider that McCain (who we both dislike) collects a paycheck as a US Senator AND Social Security. No wonder he wants me to pay into a Social Security system I'll never get the benefit of.

I hate to disappoint you, but I don't spend every waking hour here just waiting to see what you say. I pop in occasionally to see what the latest BS exaggerations are.

Last night on AM 600 whistleblower and Investment adviser Catherine Austin Fitts stated "We've been draining value out of the real economy, and the proposed bailout will just funnel investments into propping up the bubble, the plan will actually send money from Main St. to Wall St., instead of the reverse. What's going on with the bailout is more than theft, "it's a coup d’état" –-a "reengineering of government institutions,".
She also pointed out that there is 4 trillion dollars that has disappeared off the books in the NY fed reserve bank and no one can or will account for it. And this "plan" will give Paulson the authority to shred the documentation. Write your reps. Oppose the bill.

Response to post #24: By concentrating its fire on hundreds of trillions of dollars in derivatives, Wall Street has not been INVESTING in anything, much less America. Wall Street has been gambling. Derivatives are not investments. Yet American taxpayers will bail out the touts at the track. Best, Don Bauder

There's an angle on the Wall Street bailout bill that Congress just passed that hasn't gotten much, if any, attention in the US press: 25% of the $700 Billion US bailout funds are going to the five largest British Banks.

British banks HSBC, Barclays, Royal Bank of Scotland, HBOS and Lloyd's TSB are slated to receive up to $175 billion (25%) of the $700 billion US taxpayer bailout of Wall Street, according to a September 26, 2008 article in The Times by Miles Costello. The story noted that “Combined, the five British lenders hold securities worth $175 billion, which they could transfer to a federally backed Treasury fund. Under the proposed terms of the rescue package, non-US financial institutions must have significant operations in America to qualify.”

Congress recently passed a Bill that provided $25 billion to US automakers to shore up their balance sheets and retool to build more energy efficient cars. Can you imagine the hue and cry if even $1 of US taxpayer bailout funds were directed to Japanese or German of Korean or British automakers because they have “significant operations in the US”? So why has no one in the know uttered so much as a peep about $175 billion of the Wall Street bailout going to Britain? What is this Lend Lease II?

Response to post #27: It was decided some time ago to buy up toxic assets of foreign banks with significant operations in the U.S. I don't know if that includes offshore tax havens, but it well might. Best, Don Bauder

Speaking of bailouts, how about Gov. Schwarzenegger's warning to Treasury Secretary Paulson on Thursday that the state might need an emergency loan of as much as $7 billion from the federal government within weeks? And then there are also the escalating San Diego budget failures.

Why don't California state and local government employee retirement funds like CalPERS dedicate their funds to investing in the future of California, San Diego, etc. by bailing out the people of California?

Response to post #30: That would open a Pandora's box. Pension funds must be invested safely. Already, such funds are taking too many risks. Remember when John Moores wanted a local pension fund to invest in the ballpark? Mercifully, the idea died. Best, Don Bauder

So did the new version of the bailout include the language that Johnny Vegas quoted earlier for bailing out public retirement systems? That seems to make sense from the perspective that they already bail out private systems.

Response to post #32: Moores didn't get SDCERS money. It was brought up at a SDCERS meeting and, as I recall, the attorney for SDCERS said it would be illegal. It was never heard from again. Best, Don Bauder

Response to post #34: I understand that as the year 1000 A.D. neared, people rushed to get absolution and indulgences, believing that the year 1000 would be the end of the world. You are doing the opposite: eating, drinking, being merry before the apocalypse. Best, Don Bauder

So did the new version of the bailout include the language that Johnny Vegas quoted earlier for bailing out public retirement systems? That seems to make sense from the perspective that they already bail out private systems.

By JF 6:46 a.m., Oct 4, 2008 > Report it

If you're referrign to the Fed's PBGC, the bailing out is substantially lower than stated/earned "retirements".

Take a look at what happened to United Airlines (BTW-this could be you very soon JF);

In a devastating blow to 122,000 workers and retirees, a federal bankruptcy judge ruled May 11 that United Airlines may default on its pension obligations and turn over control of its pension funds to a federal agency that is already swamped by corporate pension defaults. Judge Eugene Wedoff approved the airline management’s request to terminate four pension plans—for pilots, flight attendants, mechanics and other ground service workers. The $9.8 billion pension plan default is the largest in US history.

The Pension Benefit Guaranty Corporation will take over the plans, but federal regulations limit the amount of pension payments it can make to a maximum of about $45,000 a year. The highest paid UAL workers, such as pilots, will face pension cuts of up to 50 percent, while lower-paid workers could lose as much as 20 percent.

Johnny,
I'm well aware of the limitations of the PBGC. There will obviously be some differences between public and private pension plans. And sorry, but that's not likely to happen to me soon, no matter how much you might wet your pants will glee over seeing public employees hurt.

By the way, today is the federally mandated "Fallen Firefighter Memorial Day". Did you remember to lower your flag to half mast? I'm trying to remember -- which day memorializes lawyers?

43 "BTW, I see no reason why the PBGC would treat a public pension failure any different from a privatse failure."

From the PBGC Mission Statement:
The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of nearly 44 million American workers in more than 30,000 private-sector defined benefit pension plans.

Response to post #47: I don't know that this is definitive. There may be more. It remains worth exploring. Maybe when the legislation was written in the 1970s, nobody dreamed that municipalities would be going BK. Best, Don Bauder

Response to post #54: The bill as written permits the czar to purchase the kind of paper you mention. But will it? I don't think so. You do. We can disagree. As to your second question: yes, I believe the bailout is an election year fraud. It simply delays the day of reckoning until after the election. At that point, whoever is elected will have to admit that, given the fact that this is an international crisis, $700 billion is a drop of spit in the ocean. Best, Don Bauder

Response to post #50: Many public pension systems are excessively generous and abusive, but that doesn't mean that the PBGC should be banned from bailing them out -- if, indeed, the PBGC is permitted to bail out public plans. Best, Don Bauder

Response to post #51: It specifically permits the Treas. Secty. to purchase troubled mortgage-based derivatives. My guess is that they will be about 100 percent of what he chooses to purchase. This is not a bailout of Main Street. It is all about the socialization of Wall St. Best, Don Bauder

response to #54:
I respectfully disagree. I believe some portion of this money will be used to purchase or ensure residential mortgages and in the case of future failures, protect college funds and pension plans affected by those failures. That being said, I wish that Sheila Baer should refrain from having the FDIC take over anymore banks. Let them orchestrate their own solutions or let them go under. Natural selection in the financial world

BTW, do you still feel that this bailout is a hoax,that Paulson is trying to run up the stock market before the election and after that, the government will say doesn’t have the money to pull off this off and drop the whole thing?